Low loan-to-value properties in prime locations

The President and CEO of Hufvudstaden sums up the year and looks forward.

At the beginning of 2022, the office and retail markets were still affected by the covid-19 pandemic. In February, the authorities lifted most of the pandemic restrictions and general advice, which led to the reopening of society. Shortly after, a new uncertainty emerged when Russia invaded Ukraine. The war has led to major destruction and human suffering in Ukraine and a sharp deterioration in the geopolitical situation in Europe. Another consequence of the war was rising energy prices for private individuals and companies. Inflation rose significantly and was more than 10 per cent in Sweden at the end of the year.

After a long period of very low interest rates, the Riksbank, Sweden’s central bank acted with several increases of the policy rate, which was 2.50 per cent at year-end. Despite the turbulent climate and the challenging economic conditions, GDP growth in Sweden was approximately 2.5 per cent. Large parts of the business sector performed positively in both Stockholm and Gothenburg, with rising employment in the labour market.

Hufvudstaden’s properties are located in the most central areas of Sweden’s two largest cities. Most of our properties have a high architectural value, which is appreciated by people and companies. We have strong and successful tenants, which generates healthy earnings capacity over time. The leases are indexed by CPI and minimum indexation, which is why the company is shielded from rising costs in society. Our financial position is very solid, with a low loan-to-value ratio. In times of change and increased uncertainty, this makes Hufvudstaden a safe investment and asset.

Changed property market

Over the past decade, the property market has performed strongly, supported by historically low interest rates and good availability of capital. The turnaround in monetary policy towards higher interest rates has had a considerable impact on the property market, leading to increased financial expenses and rising yield requirements. For the property sector, this entailed an intensified focus on debt, access to capital and the ability to meet financial covenants. The changed market situation resulted in a decline in property sales from the preceding year’s peak listing, and the transaction volume in 2022 amounted to approximately SEK 200 billion.

Hufvudstaden has a favourable position, with low loan-to- value and properties in prime locations. At year-end, the loan-to-value ratio was 19 per cent and there are unutilised loan commitments for all loans maturing in the next three years. Property holdings were valued at SEK 49.5 billion (48.8) at year-end. The increase in value was due to rising net operating incomes and investments in the portfolio, but was largely offset by higher yield requirements. NAV amounted to SEK 201 per share (199) and the share price was SEK 148.30 per share.

Development of marketplaces

Hufvudstaden’s long term strategy is to continuously develop our marketplaces to be the first choice for companies, brands and people. The right composition of operations is crucial to create an attractive overall setting.

Hufvudstaden is in an intensive period of development projects and the identified project volume amounts to approximately SEK 3 billion. The largest development project is Johanna in Gothenburg, where we are creating a new meeting place that strengthens the Fredstan area and the central parts of the city.

In the fire-damaged Vildmannen 7 property in Bibliotekstan, the reconstruction project is in it’s completion phase. The property will be entirely unique, with the original façade preserved and an ultra-modern building behind it. All office spaces are leased and two strong fashion brands have signed leases for the ground floor. The first tenants will move in around mid-year 2023.

To better address the changes occurring in the retail sector, development of the physical and digital environment in the NK department stores is under way. The right range, first-class service and unique experiences provide a basis to be a world-class department store.

Strong demand for offices in central locations

For many companies, the importance of being able to offer employees an attractive workplace in a central location has increased. The office creates added value through opportunities for creative meetings, to build corporate culture and to establish business contacts. The choice of office address is also impacted by the surrounding environment. A unique offering of restaurants, shopping, service, exercise and culture are now even more highly appreciated by office tenants. This trend has led to strong demand for offices in our marketplaces.

In the Stockholm CBD, the vacancy rate declined and was approximately 5–6 per cent at year-end. The top rents increased to more than SEK 10,000 per square metre. In the Gothenburg CBD, the vacancy rate was somewhat higher at approximately 7–8 per cent, mainly due to the completion of new office properties, which increased supply of office space. The top rents are about SEK 4,500 per square metre.

The recent years’ demand for increased flexibility and service continues. Hufvudstaden’s Cecil Coworking offering has proved successful and is essentially fully leased. However, leasing an individual office with a longer lease duration is what remains most in demand.

Recovery and new challenges in the retail sector

The retail sector was strengthened in both Stockholm and Gothenburg during the spring following the lifting of restrictions and recommendations. The war in Ukraine created some uncertainty in the market and resulted in cost increases within many areas. Despite this, sales of consumer durables increased somewhat during the year. The trend of working remotely a couple of days a week has changed footfall, with a decline on weekdays and an increase on Saturdays. In our marketplaces, we can see higher average purchases than prior to the pandemic. However, cost increases have begun to erode households’ purchasing power and it is highly probable that private consumption will be affected going forward.

The rental market for retail premises performed positively during the year. The stores on the street in our properties in Stockholm, were essentially all premises let at year-end. Market rents were stable and some leases were signed at top rent levels. In Gothenburg, demand was somewhat cautious, but a couple of new contracts were signed for the vacancies that arose during the pandemic. In the NK department stores, the streamlining of the women’s floors was completed, resulting in improved customer flows and the establishment of several new brands and concepts.

In NK Saluhall in Stockholm, a new food store opened to strengthen the department store’s offering of food and groceries. On NK e-commerce, several departments and an extended product offering were launched, which improved sales for the year.

The NK Retail operations have been part of the Group for two years. The acquisition has led to synergies in several areas. In the department stores, brand repositioning and activation of spaces have been simplified, the development of NK e-commerce has progressed more rapidly and the cooperation on the marketing of NK was strengthened. The first two years for the operation have been challenging, with the pandemic, war and high inflation. The objective going forward is to increase profitability for NK Retail and to further strengthen our NK department stores.

Sustainability and energy in focus

The rising electricity prices led to attention being directed towards the energy market. Large sections of society focused on energy-saving measures, both to reduce costs and climate impact, but also to support the entire energy system.

Sustainability and a long-term approach permeate Hufvudstaden’s operations, not least from a climate change perspective. Our sustainability plan governs our daily work. Based on this, we work to minimise our footprint, future-proof our properties and collaborate to create long-term sustainable business.

For Hufvudstaden, reduced energy use is a key aspect of minimising our climate impact. Together with our tenants, we work consistently to reduce energy consumption. Several major energy-saving projects were conducted during the year, including in the Pumpstocken and Rännilen blocks.

All properties were analysed based on climate change and extreme weather. Where needed, preventive measures were taken.

Several of Hufvudstaden’s properties have stood for more than 100 years and are still appreciated for their architecture and design. Adaptation of the properties and premises is conducted with a focus on creating high flexibility and long-term solutions to minimise future material use and redevelopment.

A recognition that we are working in the right direction is that we retained our high ranking from the preceding year in the GRESB’s international sustainability ranking and were named Global Sector Leader in the Office and retail category.

Customer focus is one of our strategies to create positive and enduring customer relations. Accordingly, we are very proud that for the fifth year in a row we managed to achieve first place in the annual Customer Satisfaction Index for offices in the Large Company category.

Higher profit

The office operations performed favourably during the year with increased rents from renegotiations and new leases. The retail sector recovered during the spring, but faced new challenges during the autumn when households were impacted by higher costs, which had a dampening effect on consumption. Gross profit from property management was SEK 1,235 million (1,221), an increase of 1 per cent. Including intra-Group rent revenue of SEK 200 million (153), the increase was 4 per cent.

Net profit for the year was SEK 722 million (2,955). The decrease was mainly due to lower unrealised changes in the value of the property holdings, largely driven by higher yield requirements, which were nearly fully offset by increased rent levels.

The future

Hufvudstaden has a unique and well-managed portfolio of properties in the most central areas of Stockholm and Gothenburg. Over the years, we have created attractive marketplaces where people, brands and companies want to be. The company has a strong financial position and is well-equipped to address the rapid changes occurring in the business environment. We are well-positioned to capitalise on business opportunities that arise in times of uncertainty. The process of adapting our offerings to changing needs continues. The strategy of good service, long customer relationships and high-quality in-house management and project development stands firm. The goal is to create the best possible conditions for the customers’ operations and increase their competitiveness.

During 2023, a great deal of focus will be placed on development and adaptation of the NK business with the goal of increasing sales and profitability. Our largest development project, Johanna in Gothenburg, will continue for several years. At the beginning of 2023, the foundation work for the new buildings will begin and redevelopment across parts of the block will start to take shape. The leasing work has commenced and completion is scheduled for 2025/2026. We will also leverage the opportunities of digital development to enhance the efficiency of the operations and use new technology in properties. Energy-saving projects have priority and the aim is for property management to be climate-neutral by 2025.

Finally, I want to extend my warm thanks to all Hufvudstaden employees for their highly committed and value-generating work during a challenging and eventful year.

Stockholm, February 2023

Anders Nygren